Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Gabriel Dechaine expects to see “a ‘tempered’ credit cycle shift” when Canadian banks disclose their third-quarter financial results.
“Deterioration in the economic outlook and factors such as inflation and the impact of higher interest rates on debt service ratios necessitate greater conservatism in provision accounting, in our view,” he said. “Mind you, banks still have 40 per cent of 2020′s performing ACL ‘build’ left on their balance sheets, which tempers the magnitude of the credit cycle shift. Our updated PCL forecasts assume performing ACL additions by all banks, with relatively larger ones for BNS and RY (since they have released 80 per cent of their 2020 ‘builds’).”
In a research report titled All eyes on credit (again), Mr. Dechaine predicted net interest margin expansion could be “a positive factor to offset the drag we expect from higher PCLs.” He said banks with U.S. exposure and large core deposit bases are expected to generate the most spread expansion, pointing to Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank.
For equity investors, the analyst thinks short-term trading opportunities “abound,” but he thinks rate hike activity is “the ultimate catalyst.”
“Big-6 bank stocks are down 6 per cent year-to-date, underperforming the market by 140 basis points,” said Mr. Dechaine. “At this point, we are wondering if too much negativity has been reflected. We see forward P/E ratios that are 9 per cent below the historical average, and we estimate that P/B multiple compression from 2022 peaks implies a 50-per-cent probability of a recession. The catalyst for a re-rating, in our view, hinges on the outlook for rate hike activity. That is, market expectations need to shift to a more dovish stance from the Bank of Canada, which would deflate concerns related to the housing market (a primary sector overhang). We’re not there yet but could be getting close. In the near-term, we believe banks well positioned into the quarter include CM (laggard, relatively strong ACL ratio), NA (potential trading surprise, CET 1 strength) and TD (NIM expansion). On the other hand, we are more cautious on BNS (lower ACL ratio) and RY (ACL ratio, Cap. Markets headwinds).”
Ahead of earnings season, which kicks off on Aug. 23, Mr. Dechaine made four target price adjustments after modest reductions to most of quarterly projections to “reflect reduced investment banking fees, lower assets under management in Wealth and slightly higher PCLs, partly offset by higher NIM forecasts.”
His changes were:
- Bank of Montreal (BMO-T, “sector perform”) to $151 from $152. Average: $151.93.
- Bank of Nova Scotia (BNS-T, “sector perform”) to $90 from $91. Average: $89.60.
- Canadian Imperial Bank of Commerce (CM-T, “outperform”) to $83 from $84. Average: $77.81.
- Royal Bank of Canada (RY-T, “outperform”) to $147 from $148. Average: $140.76.
He maintained his targets for these banks:
- Canadian Western Bank (CWB-T, “outperform”) at $38. Average: $36.46.
- Laurentian Bank of Canada (LB-T, “sector perform”) at $53. Average: $46.15.
- Toronto-Dominion Bank (TD-T, “sector perform”) at $102. Average: $100.74.
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CIBC’s Paul Holden also adjusted his targets for Canadian banks on Tuesday.
“Our bias towards a defensive stance stopped working over the last four weeks,” he said. “Should we be shifting our thinking? The range of interest rate and economic expectations for F2023 remains wide, while bank valuations are only modestly discounted (average P/BV of 1.6 times is only 5 per cent below historical). Also, we continue to see more downside risk to 2023E consensus EPS versus upside potential. We maintain a more defensive bias with RY and NA as our only Outperformer Rated banks.”
His changes were:
- Bank of Montreal (BMO-T, “neutral”) to $143 from $142. Average: $151.93.
- Bank of Nova Scotia (BNS-T, “neutral”) to $87 from $88. Average: $89.60.
- Canadian Western Bank (CWB-T, “neutral”) to $30 from $32. Average: $36.46.
- Laurentian Bank of Canada (LB-T, “neutral”) to $46 from $43. Average: $46.15.
- National Bank of Canada (NA-T, “outperformer”) to $104 from $102. Average: $103.33.
- Toronto-Dominion Bank (TD-T, “neutral”) to $97 from $100. Average: $100.74.
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Seeing “meaningful progress” toward the close of its merger with Cresco Labs Inc. (CL-CN), Echelon Capital Markets analyst Andrew Semple moved his rating for Columbia Care Inc. (CCHW-T) to “tender” from “buy.”
The move comes after Monday’s release of weaker-than-anticipated second-quarter financial results. That included revenue of $129.6-million, missing both Mr. Semple’s $148.4-million estimate and the consensus forecast of $141.5-million.
“The largest factor behind the soft print was the Company’s Colorado and California businesses, while most states (incl. those most meaningful to future growth and valuation) contributed solid improvements to revenues, margins and earnings,” said Mr. Semple. “Management noted that sales growth would have been 9 per cent quarter-over-quarter and adj. EBITDA margins around 15 per cent excluding the q/q detractions from Colorado and California. Based on these metrics, even if Colorado and California held steady this would still imply a softer than expected quarter for the rest of the portfolio, which we attribute primarily to wholesale revenues trailing our expectations, after wholesale revenue did not recover as much as expected from a 36-per-cent quarter-over-quarter decline in Q122.”
Mr. Semple also emphasized the New York-based multi-state cannabis provider did not reiterate its 2022 guidance of sales of $625-$675-million and adjusted EBITDA of $120-135-million. Instead, it now expects sales to grow sequentially by mid single digits through the second half of 2022 and EBITDA margins to improve by 150-250 basis points.
According to the analyst’s calculations, that expectation would lead to sales of approximately $520-$540-million and adjusted EBITDA of $65-$75-million, which he called a “meaningful” reduction to the original guidance.
“The Company’s prospects remain encouraging, supported by the Company’s pending merger with Cresco Labs (CL-CSE, Buy, target $15.00), the many high growth markets today within Columbia Care’s portfolio of businesses (e.g., New Jersey, Virginia, West Virginia, and Ohio), and several states where adult-use cannabis has recently launched, is already approved, or is likely to be approved in the near future (e.g., New Jersey, New York, Virginia, and Maryland),” he said.
“Columbia Care continues to make progress towards closing the Cresco Labs transaction. The Company received shareholder approval in recent months (98 per cent of votes in favour), expects to announce definitive agreements for divestitures in the next 30-45 days, and has submitted applications for regulatory approval in most states. Management reiterated the timeline to closing the transaction by year-end 2022, though we would not be surprised to see the timing slip to 2023 based on the number of outstanding milestones items still to be completed.”
Reducing his forecast for the remainder of 2022 and 2023, Mr. Semple cut his target for Columbia Care shares to $7 from $8. The average on the Street is $7.75.
“Given the significant progress made towards closing the acquisition, we feel a tender rating on CCHW shares is most appropriate at this time. We are valuing Columbia Care shares based on our $15 per share target price for Cresco Labs and the proposed exchange ratio of 0.5579 CL shares per CCHW share, discounted by 15 per cent because the transaction still has significant milestones to closing,” he concluded.
Elsewhere, Canaccord Genuity’s Matt Bottomley trimmed his target to $3.75 from $4.50, keeping a “buy” rating.
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National Bank Financial analyst Rabi Nizami sees the potential for Arizona Metals Corp. (AMC-X) to discover multiple deposits at its Kay Mine project, which he thinks has the “potential for a high-grade and low-cost underground mine.”
In a research report released Tuesday, he initiated coverage of the Toronto-based exploration stage company with an “outperform” rating.
“The past two years of exploration drilling at the Kay Mine project provided regular catalysts to the market and drove share price returns by demonstrating high grades and wide intercepts of polymetallic VMS mineralization as well as a refined understanding of geological controls which are indicative of more upside to come,” said Mr. Nizami.
He called Arizona a “top jurisdiction” for copper development, citing “the global scarcity of projects in low geopolitical risk areas.”
“Some observers have expressed caution in recent years due to highly publicized permitting challenges at Rosemont and Resolution Copper,” he added. “In our view, those projects are not comparable to the Kay Mine, key differences being: i) smaller scale ii) underground with minimal surface footprint iii) Federal lands administered by BLM, not USFS, iv) no known exposure to critical species or Indigenous tribes, and iv) no organized opposition. We concede that some opposition may arise at a later stage; however, the driver of the share price over the next few years remains exploration drilling, until the full potential scale of VMS mineralization, and thus, a final understanding of potential project scale, can be determined.”
Mr. Nizami set a target for Arizona Metals shares of $7.25. The current average is $9.33.
“Arizona Metals Corp. is leading an extensive, modern exploration effort on the historic Kay Mine project and we expect it to continue delivering exploration catalysts from the fully funded more than 151,000 metre drilling program with high expectations for new discoveries to re-rate the stock over the next few years,” he concluded. “Our Speculative risk qualifier and target derivation method of 0.80x NAV are aligned with other exploration stage companies in our coverage universe and the target multiple is comparable to precedent M&A transactions. The initial Kay target has sufficient drilling to support a sizeable maiden resource for a standalone operation and upcoming results from the Central and West targets could uncover more Kay-like discoveries over time. Grade, dimensions and preliminary metallurgy results to date support potential for a low-cost underground mining operation to eventually be developed with a minimal surface footprint.”
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Expecting “strong outperformance” to continue, National Bank Financial analyst Mike Parkin added Alamos Gold Inc. (AGI-T) to the firm’s “Top Picks” list.
“Alamos reported, in our view, a quality Q2 earnings result in late July, but what was most impressive to us was that guidance was maintained despite the elevated inflationary environment facing the industry,” he said. “Now that Q2 earnings is over, we see that Alamos Gold is one of the very few operators that did not tweak their 2022 cost guidance higher with Q2 earnings, thanks to a production portfolio that is executing well (if not better) to plan and has minimal exposure to elevated diesel prices. With a strong second half expected and a healthy balance sheet we see good potential for Alamos’ relative outperformance to continue.”
Mr. Parkin noted Alamos is up 4 per cent since he upgraded his recommendation for its shares to an “outperform” recommendation in late April. The S&P/TSX Global Gold Index is down almost 25 per cent during that time.
“In our opinion, investors looking for a company to invest in that has lower than average capex risk, is performing well operationally, and has a number of supportive catalysts due out over the NTM [next 12 months] should consider Alamos Gold,” he said. “Earlier this year, Alamos greatly de-risked its balance sheet by deferring the development of the Lynn Lake gold project until after the Island Gold Mine Phase 3+ expansion project was complete. By our current estimates, we see Alamos needing to draw on the existing US$500 million RCF by no more than US$100 million over the next few years before being able to easily repay it thanks to expected robust FCF from the then bigger and even more profitable Island Gold Mine. With a NAV concentrated in Canada, quality near and medium term production growth potential, and a healthy financial outlook we feel a premium valuation will easily be supported for Alamos Gold. Alamos Gold pays a regular quarterly cash dividend (US$0.025/sh) and has an active NCIB outstanding.”
Mr. Parkin maintained an “outperform” recommendation and $12.50 target for Alamos shares. The average on the Street is $13.20.
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Scotia Capital analyst Himanshu Gupta continues to see Chartwell Retirement Residences (CSH.UN-T) as a “high-quality irreplaceable retirement home portfolio in Canada.”
However, while still seeing “value in the name,” he now believes “patience is required to fully realize it,” leading him to lower his rating to “sector perform” from “sector outperform.”
In a research note released Tuesday, he pointed to three reasons for his downgrade: slower-than-expected “meaningful” occupancy recovery, a short-term focus from public markets on senior housing stocks and recent outperformance versus the rest of the sector.
“Investors have taken shelter in net lease sector given the cash flow visibility and also seniors housing as occupancy recovery off COVID-lows is less sensitive to economic outlook compared to other commercial sectors,” he said. “We also mentioned that set-up is there but CSH will have to execute as well. Today, we think CSH has already outperformed the REIT sector by 10pt year-to-date and given delayed recovery, could give back some outperformance.”
Mr. Gupta trimmed his target to $12.50 from $14. The average is $13.21.
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With another quarterly report falling short of his expectations, Canaccord Genuity analyst Doug Taylor lowered MCI Onehealth Technologies Inc. (DRDR-T) to “hold” from “speculative buy,” warning balance sheet flexibility is “waning.”
“While there are positive items in the report, including the expectation that long-awaited data services revenue will pick up sharply in the quarters ahead, another quarter of heightened cash burn has limited the company’s balance sheet flexibility,” he said. “We’d prefer to see a positive and more consistent EBITDA performance in order to better discount the growth potential.”
After the bell on Monday, the Toronto-based company reported third-quarter revenue of $13.8-million, up 23 per cent year-over-year but below Mr. Taylor’s $15.1-million estimate. Adjusted EBITDA of a loss of $2.9-million also missed the analyst’s forecast (a loss of $1.2-million), which he attributed to a mix in lower margin revenues and higher expenses.
“MCI ended the quarter with $1.0-million in cash (vs. $3.4-million in Q1) and has $6-million in available liquidity including unused credit capacity, which was recently boosted by a shareholder loan facility,” he said. “While this loan suggests a willingness by principal shareholders to continue to backstop MCI’s progress, we believe that the outlook for other shareholders is becoming increasingly clouded by balance sheet and dilution concerns. Management re-stated the company’s goal of being EBITDA and FCF positive in the “back half of 2022″ (vs. the prior expectation of Q3/22), which suggests further cash burn in any scenario. This balance sheet risk weighs on our willingness to discount growth initiatives.”
After reductions to his financial forecast, Mr. Taylor trimmed his target for MCI shares to $1.50 from $2. The average is $2.15.
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In response to recent share price depreciation, Canaccord Genuity analyst Shaan Mir raised his recommendation for SNDL Inc. (SNDL-Q) to “speculative buy” from “hold” on Tuesday.
“As a result of what we believe to be an overexaggerated decline in the company’s share price, we note that current trading levels imply a valuation for SNDL that is less than its cumulative cash, short-term investment and credit portfolio (predominantly held in the SunStream JV),” he said. “With SunStream deploying a large majority of its capital in credit to U.S.-based borrowers, we believe the risk of default is outweighed by an improving fundamental backdrop south of the border. When combined with ample cash and no debt balances, we believe the company is one of the best situated Canadian LPs to fund share repurchases, invest across verticals in all operating segments, and engage in strategic M&A. As such, we are upgrading our recommendation.”
On Aug. 12, the Calgary-based cannabis retailer reported second-quarter revenue of $223.7-million, up from $17.6-million during the same period a year ago and ahead of the analyst’s $214.0-million estimate. Adjusted EBITDA of a loss of $25.93-million fell short of his forecast of a $1.47-million loss.
“SNDL Inc. reported its FQ2/22 (June-ended) financial results, which came in ahead of our top-line expectations; however, they showcased a declining adj. EBITDA profile as sector-wide valuation declines impacted the company’s investment portfolio,” said Mr. Mir.
“We note that the loss was driven solely by the ($38-million) equity pickup on the SunStream portfolio, with all other segments reporting positive adj. EBITDA for the period. SNDL currently has $416-million of cash and short-term investments and no debt on its balance sheet.”
He lowered his target for SNDL shares to US$4.25 from US$5. The average on the Street is US$5.01.
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JP Morgan’s Tien-Tsin Huang raised his targets for a group of tech stocks in his coverage universe on Tuesday.
His changes include:
- Lightspeed Commerce Inc. (LSPD-T, “underweight”) to $34 from $30. The average is US$41.93.
- Nuvei Corp. (NVEI-Q/NVEI-T, “overweight”) to US$46 from US$42. Average: US$62.
- Telus International Inc. (TIXT-N/TIXT-T, “overweight”) to US$35 from US$32. Average: US$34.36.
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In other analyst actions:
* BMO Nesbitt Burns analyst Raj Ray upgraded Galiano Gold Inc. (GAU-T) to “market perform” from “underperform” with a 75-cent target, up from 50 cents and above the 60-cent average on the Street.
* National Bank’s Don DeMarco raised his Aya Gold & Silver Inc. (AYA-T) target to $10.50 from $8 with an “outperform” rating. The average is $11.80.
* JP Morgan’s Seth Seifman raised his Bombardier Inc. (BBD.B-T) target to $36 from $25 with a “neutral” rating. The average is $51.55.
* Desjardins Securities’ Kyle Stanley trimmed his target for Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) to $60 from $65, maintaining a “buy” rating. The average is $59.45.
“Revenue growth is accelerating across the portfolio, while its active asset management program monetizes older-vintage assets and redeploys proceeds into the NCIB at a significant discount to NAV. CAR’s size, liquidity and stable cash flow profile are attractive in the event of slowing economic activity,” he said.
* Mr. Stanley also reduced his Killam Apartment Real Estate Investment Trust (KMP.UN-T) target to $22.50 from $25 with a “buy” recommendation. The average is $21.82.
“KMP reported 2Q22 results which were generally in line with expectations. Market fundamentals are trending positively and KMP is poised to benefit from the delivery/stabilization of five development projects through 2023,” he said.
* Desjardins Securities’ Gary Ho reduced his CareRx Corp. (CRRX-T) target by $1 to $6 with a “buy” rating, while Canaccord Genuity’s Tania Armstrong-Whitworth cut her target to $6.50 from $8 with a “buy” rating. The average is $7.14.
“CRRX reported mixed 2Q results,” said Mr. Ho. “EBITDA was in line with our estimate but missed consensus; estimates are likely to be reset to account for the Extendicare loss and labour challenges. However, we remain constructive on CRRX’s organic pipeline, history of successful cost containment and M&A execution, which should offset these headwinds and drive margin expansion over the medium term.”
* Barclays’ Raimo Lenschow raised his target for Descartes Systems Group Inc. (DSGX-Q, DSG-T) to US$72 from US$62 with an “equal-weight” rating. The average is US$76.30.
* TD Securities’ Brian Morrison hiked his target for Dollarama Inc. (DOL-T) to $86 from $82 with a “buy” rating. The average is $79.31.
* Canaccord Genuity’s Robert Young lowered his target for Enthusiast Gaming Holdings Inc. (EGLX-T) to $7 from $7.25 with a “buy” rating. The average is $6.96.
“At these levels, we believe Enthusiast shares appear attractive despite the pullback in digital media names,” he said.
* CIBC’s Jacob Bout cut his Farmers Edge Inc. (FDGE-T) target to $1, below the $2.31 average, from $3 with a “neutral” rating, while Canaccord Genuity’s Doug Taylor lowered his target to $1 from $2.50 with a “hold” rating.
“We continue to rate the stock a HOLD and recommend investors look for value elsewhere,” said Mr. Taylor. “With new CEO Vibhore Arora at the helm, the company detailed a revised strategy including, most notably, the elimination of the ‘free-trial’ programs which have failed to consistently translate into paying subs. Forthright discussions of the business on the company’s earnings call reaffirmed expectations are now reset. With that said, the story continues to be challenged by elevated cash burn ($26.3-million in Q2) and dwindling balance sheet resources. The company had $9.0-million in cash and $75-million in available credit facility ($10-million drawn since July 15 close). The resulting risk of dilution or other negative balance sheet events obscures the ability to discount the revised growth profile.”
* CIBC’s Hamir Patel raised his Hardwoods Distribution Inc. (HDI-T) to $46 from $41, below the $63.93 average, with an “outperformer” rating.
* Scotia Capital’s Mario Saric raised his H&R REIT (HR.UN-T) target to $17 from $16.50 with a “sector perform” rating. The average is $16.39.
* RBC’s Sam Crittenden cut his target for Ivanhoe Mines Ltd. (IVN-T) to $12 from $14 with an “outperform” rating. The average is $13.46.
“Ivanhoe remains a preferred copper name as Kamoa-Kakula continues to grow into one of the world’s largest, low cost copper mines. Platreef and Kipushi provide further optionality and exploration success at the Western Forelands could be a catalyst later this year. We reiterate our Outperform rating and lower our target price on lower multiples, as we have done with peers,” said Mr. Crittenden.
* JP Morgan’s John Royall raised his MEG Energy Corp. (MEG-T) target to $28 from $25, keeping a “neutral” rating. The average is $25.19.
* Canaccord Genuity’s Derek Dley reduced his Taiga Motors Inc. (TAIG-T) target by $1 to $8, matching the average, with a “buy” rating.
“We believe Taiga offers exposure to a unique area of the electrification market and believe the powersports industry will exhibit healthy growth over the coming years,” he said.
* TD Securities’ Craig Hutchison cut his Turquoise Hill Resources Ltd. (TRQ-T) target to $34 from $38 with a “hold” rating. The average is $40.
David Leeder